Russia was and continues to be our strategic partner
The German Eastern Business Association is the brain child of West German entrepreneurs. It was established in 1952 at the height of the Cold War at the initiative of German business representatives, who understood the advantages of developing economic relations with Eastern Bloc states. It’s worth pointing out that the organization was created in close cooperation with the German Federal Government and German business unions. The Committee that played a key role in establishing economic ties between German business circles and countries in Eastern Europe and Asia that did not have diplomatic relations or trade agreements with West Germany. Capital Ideas talked to Michael Harms, the Executive Director of the German Eastern Business Association, about the organization.
Mr. Harms, the German Eastern Business Association is a famous organization that doesn’t need any advertising. Still, could you tell our readers from different countries what the Committee’s goals are and what it does?
Our Committee’s main goal is to support German business activity in Eastern European countries, which we define as the vast region of the world located between Prague in the west and Wladiwostok in the far east. It includes 29 countries, which account for 20% of Germany’s foreign trade turnover. This is a very significant number – larger than the volume of our trade turnover with the US and China combined. So this region is very important for German business, not only when it comes to trade.
German business has invested a lot in this region, which is an important driver of economic growth for Germany.We also lobby for this region in Germany, establishing bilateral contacts, organizing conferences and trips, establishing ties among companies and between companies and state officials, and providing concrete services. In other words, we do everything that business associations usually do.
How reputable is the German Eastern Business Association in Germany? Does the German government take its opinion into consideration? Which German-Russian economic cooperation projects have the Association’s recommendations had an impact on?
Maybe I could say a few more words about our history?
Yes, of course.
It started to operate in 1952, when Germany didn’t even have diplomatic ties with socialist countries. This economic committee was founded in order to establish these ties. Because of this, we have always worked closely with the Federal Government and the Federal Chancellor, as well as with individual ministries, primarily, of course, with the Ministry of Economic Affairs and the Ministry of Foreign Affairs.
I think that our recommendations are very much taken into consideration. This applies to topics like the activities of specific companies as well as entire industries, along with recommendations for specific countries, since the 29 countries that are part of the Association all have their own nuances.
But, of course, we also operate within the broader political context. A famous historical example is the gas pipeline deal of the 1970s, which was organized and supported by our Association. Right now, in terms of important political topics, we currently handle problems related to sanctions, which are a big challenge for our companies. And overall, we are holding and intense and trusted dialogue with our politicians.
How many members does the Committee have and who are they?
About 350 companies are part of the German Eastern Business Association right now. All of them are large companies, global players. But there are also a lot of companies who are hidden champions of their industries. Moreover, our association includes all chambers of commerce in the region, and we actively cooperate with all of them. And most importantly, all industrial and business unions are part of the Committee as well. This includes the Federation of German Industries, the Union of Chambers of Commerce and Industry, the Association of German Banks, and the Federation of German Foreign Trade, etc. So we cover not only companies, but also Germany’s leading business associations.
But the Committee doesn’t have any representative offices abroad. How does it carry out its operations?
In terms of representation in specific countries, we operate through bilateral chambers of commerce. They are our partners of sorts. They are not our partners in the legal sense, but in practice we are part of the same structure and work very closely on the ground with the chambers of commerce.
How many events does the Association hold annually? Which will be the most important events in Russia in the near future?
We hold over 100 events every year, both domestically and abroad. I can give you a few examples. In the middle of April, we attended the international ATOMEXPO forum in Sochi together with a German business delegation. We have established a good relationship with the Russian state company Rosatom. Moreover, our Chairman Wolfgang Büchele hosted a breakfast during the Munich Security Conference in February with the Ministers of Foreign Affairs Sergey Lavrov and Heiko Maas. This meeting already has a tradition and CEOs from big Russian and German companies are taking part in the discussion. Then, just like every year, we attended the Saint Petersburg International Economic Forum (June 6-8, 2019), where we held the “Russia-Germany” round table. We will most likely attend the Eastern Economic Forum in Vladivostok in the beginning of September and the Russian Railways conference in October. We are also attending a meeting of the “Petersburg Dialogue” German-Russian public forum. These are just a few examples of what the Committee does in Russia.
During the best years of cooperation between Russia and Germany, Moscow and Berlin spoke enthusiastically about a strategic partnership between the two countries. High-ranking German politicians, as well as leading representatives of the German economy, declared that the country is interested in a strong Russia. What kind of Russia is Germany interested in now?
Just like before, I am confident that the goal remains the same. of course we are interested in a strong Russia, because a weak Russia that, God forbid, ends up in some kind of crisis or turbulence, in no way corresponds to the interests of Germany or the European Union as a whole. So the goal remains the same. The only matter I would show some restraint in today is the issue of a strategic partnership. Of course taking into account all of the economic and political challenges that we have encountered at this stage, this concept is brought up less frequently. But again, I think that from the point of view of our Association, Russia was and continues to be our strategic partner. This is completely obvious. It’s enough to look at a map to understand the fact that not a single fundamental problem facing humanity today can be solved without Russia.
Mr. Harms, there seems to be no end in sight to the sanctions against Russia and Russia’s counter-sanctions. How difficult is it for German and Russian companies to work under these conditions? Is it fair to say that everyone has already adapted to the sanctions and they don’t get in the way of cooperation anymore?
I would make a slight amendment to your question, because I don’t think there’s “no end in sight” to the sanctions. First, I’d like to point out that Russia was, overall, fairly tempered in terms of its reactions to the American and EU sanctions. This is a really positive thing. Second, the EU sanctions have not become any more strict since 2014. When it comes to the US sanctions, we really are quite critical of them, and there are constantly new aspects that get in the way of business. Of course, people adapt to everything, but I don’t think this is a scenario in which we should say that the sanctions don’t get in our way. They obviously do get in the way and we are against new US sanctions of any kind. We have to absolutely oppose these sanctions. However, we are realists and we understand that political problems, primarily the ones in Ukraine, must be resolved before the sanctions to be lifted. And I very much hope that there will be new developments in the Minsk process after the Ukrainian election and some concrete offers from the Russian side.
According to official records, the number of German enterprises operating in Russia decreased by 6-7% recently. However, investment volumes of German companies in Russia has grown. How do you explain this?
You have to take a closer look at what’s happening, because numbers like this are just surface statistics. Of course, some small companies probably left the Russian market. But if we look at companies that do real business in Russia, they all stay. You may remember that a few years ago there was a story about Opel exiting the Russian market, but Opel now is coming back. It may have been under new management, but it is coming back to Russia.
In terms of an increase in investment volumes, I’m afraid the numbers aren’t quite right here either. I would say that investment volumes remain at a good level. When we look at specific projects, we see that investments continue and companies keep investing, but I would not say there has been any kind of explosive growth.
Nord Stream 2 is a relevant topic today. Opponents of the project argue that its implementation will make Germany dependent on Russia. Is this the case?
This is not the case at all. Germany gets approximately 35 percent of its gas from Russia. Even if this figure increases a little, Nord Stream 2 is a much needed project for us because North Sea gas reserves are dwindling. We need gas in order to resolve our environmental issues, to reduce carbon dioxide emissions. In order to do this, we need modern power plants that run on gas. I’ll repeat once again that there is no dependency to speak of, so I believe this statement is incorrect.
Officials at the European Commission expressed the opinion that Nord Stream 2 contradicts the EU’s energy plans to diversify its energy supply sources. Is this really true?
I can’t support this statement either. I think that the main goal of politicians is to create regulatory frameworks and to competently regulate the market. But inside this market, the companies, the economic entities themselves must decide where, how, and from whom to purchase gas. Because not a single penny of EU or German government funds has been invested into Nord Stream. If private companies decide, within the scope of the existing regulatory framework, to participate in the construction of the Nord Stream, then, as believers in the market, it would be correct for us not to interfere. Because when the government starts to dictate what companies should buy and where, we end up with dismal results. So if there are other opportunities to obtain gas like LNG, that’s great. But they have to compete on the market.
But there is interfering. The US is adding pressure, trying to thwart Nord Stream 2. And the pressure is not only on the German Federal Government, but also directly on the companies involved in the construction of the project. Can Germany avoid caving under pressure, and how?
Let’s be fair: right now, aside from some letters and political declarations, there is nothing specific. So far I am fairly optimistic and think the pipeline will be completed. I think that we found a solution within the European Union to extend the third energy package to the third section of this gas pipeline, and all countries, including key ones, supported this compromise. Germany will negotiate on this matter on behalf of the European Union. So I hope that we will be able to implement Nord Stream 2 as planned, which is important for Europe.
If the US carries out its threat and introduces sanctions against German and other foreign contractors, what will happen? Will Russia be able to build the pipeline on its own, without external help?
You know, my job description doesn’t include making up negative scenarios. Let’s assume that we are going to finish building the gas pipeline and that everything will be fine.
Yes, let’s assume that. Is there a chance that the restrictions on Russia will result in Russia turning its back on the West and look to the East – to China or Japan, which Moscow is holding a dialogue with right now?
Well, we have nothing against Russia cooperating with Asia. After all, Russia is a giant Asian power. And it’s completely natural that Russia will look for ways to cooperate with China, with Japan, or Korea. I think that multi-vector development is key. I must say that our dialogue with the Russian government is going well, and everybody tells us that, of course, working with the European Union is a big priority for Russia. So I don’t expect a one-sided turn like this and don’t see it as a potential danger.
Mr. Harms, Russia has been actively implementing import substitution policies in light of the sanctions. Do you think this is justified and can lead to the effective development of the Russian economy?
Here, my answer is twofold. On the one hand, yes, I understand this position. Of course, any government is interested in creating more jobs, establishing more high-tech manufacturing plants, collecting more taxes, and so on. This is a completely appropriate objective and we understand this agenda. We see this happening in many countries, and German business is ready to support it by, among other things, investing in Russia.
On the other hand, we are critical of this approach if it’s protective and administrative in character. Unfortunately, we are seeing these tendencies as well. Here, the same principle that I mentioned when talking about the Nord Stream applies: first and foremost, the logic has to be financially sound. Russian clients, or enterprises that are purchasing technology, need to be free to decide where they get it from: from local or foreign manufacturers. The competition must be fair, the same rules must apply to everyone. If this is implemented, we have nothing against the establishment of manufacturing facilities in Russia.
It’s clear that isn’t possible to substitute all imports. Still, is there a risk that Russia’s focus on import substitution will scare off German investors?
Of course, if you take things too far and over regulate, engaging in excessive protectionism, there is a risk of scaring off investors. And this is reasonable.
In your opinion, what steps can Russia take to attract more foreign companies?
I think that Russia and the Russian government are sticking to good policies in this respect. The investment conditions have become better, the regulatory framework is good, a system of benefits of preferences has been created. There is the Russian export center and various associations that support medium-sized business, there are different financial instruments, and the regions have created very good conditions. Overall, I think the biggest obstacle right now are the political risks that are related to operational risks, to the sanctions. So the most important thing is to resolve these political issues.
Over the past few years, there has been a growing localization trend in Russia. In your opinion, is this trend viable, does it have a future?
At its core, this is the same question as the one about import substitution. It’s two sides of the same coin. Everything I said about import substitution can be applied to localization as well. The correct policy is to avoid protectionism and too much administration, a sort of rollback to a planned economy, which is what we are partially witnessing in this process.
Mr. Harms, we’d like to ask a personal question. You speak excellent Russian, on par with a native speaker. How do you know the language of Pushkin and Dostoevsky so well?
My mother is Russian, so that’s a big part of it. And I’ve spent half of my life in Russia, I studied at MGIMO. Plus, I worked in Russia. So there is your explanation.
Because of what you do, you’re in Moscow a lot. What are your impressions of the Russian capital?
I have fantastic impressions of the capital. Moscow, especially under Mayor Sergey Sobyanin, took a giant leap forward in terms of development. The city is a true global center with very interesting architecture, great infrastructure, including transport infrastructure, with a rich cultural life, and a lot of different restaurants – it’s a city of many opportunities. So Moscow is, I would say, one of those underappreciated capitals of the world. It probably has to do some more work on its image, but any person who sees it with own eyes comes back from Moscow absolutely impressed.